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Saturday, January 4, 2014

The bulls vs bears

The current bull run on global market is expected to continue into 2014 but the question is for how long. Predicting an end to it is impossible. So I concurred with the following Buttonwood article in The Economist that the market is getting pricier by the day. The daily or weekly record closes will somehow ends.

On the local front, the foreign fund outflow has been growing by the months and the local institutions are there to pick up the batons. Retail participation is currently low too. My prediction is that 2014 will be a volatile year with many mini-runs. Although I am bad at timing the market, I believe some correction is due in the Bursa. So I will have to practice something that every investor should do, which is formulate and execute Target Price (TP). I will exit the market once my following TPs are reached. Having Cash is always better in volatile periods.

TP for Sunreit - RM 1.50

TP for Cypark - RM 3.00

TP for Datasonic - RM 2.50

TP for OCK - RM 1.00

The Buttonwood article:

EQUITY
markets finished 2013 with a bang, with the S&P 500
index delivering a return to investors of more than 30%, once dividends
are included. And investors' optimism appeared to be borne out by trends in the
American economy, the world's largest, as third-quarter
growth figures were revised higher on December 20th to show an annualised gain
of 4.1%.

Even so, there is something slightly odd
about this rosy picture. Economic growth is good for the stockmarket because a healthy
economy should boost profits. But the data show that profit growth slowed
significantly in the third quarter. Total corporate profits in America grew by
$39.2 billion over the three months to September, compared with a $66.8 billion
rise in the second quarter; domestic profits rose by $12.7 billion, down from
$37.8 billion.

As a result, the big gains of 2013 were caused
by investors re-rating the equity markets (giving shares
a higher valuation) rather than because of the profit fundamentals. Total profits for s&P 500
companies in 2013 are likely to have risen by only 7.7%, a long way short of
the gains in the index.

Equity investors are always
forwardlooking, of course, so perhaps their optimism was caused by their views
on profits in 2014. That sounds plausible in theory, but the facts are rather different; analysts spent December revising down their profit forecasts.

A slowdown in profit growth would hardly
be surprising, given that profits are at their highest as a proportion of
American GDP since the second world war. But that points to another oddity. On
the best long-term measure, the cyclically-adjusted price-earnings ratio (which
averages profits over 10 years), American equities trade on a multiple of 25.4,
according to

Professor Robert Shiller of Yale University, well
above the historic average.

Why would a higher-than-average p/e ratio be justified? For
individual stocks, the answer is clear: rapidly-growing companies trade on a
high multiple of current profits because their future profits are expected to
grow strongly. But American companies do not fit the template. They are trading
on a high multiple at a time when profits are already historically high and growth appears to be slowing.

The most common explanation for this discrepancy
is that monetary policy is driving the equity market. Holding down both
short-term rates and long-term bond yields forces investors out of
cash and bonds and into the stockmarket. In 2013 fixed-income
mutual funds suffered their first annual outflow since 2004.

The only period when the stockmarket faltered
in 2013 was during the summer, when the Federal Reserve talked of reducing the
scale of its monetary support. By December, when the Fed did actually announce the
tapering of its asset purchases, the markets were braced for the bad news. The
scale of tapering was also quite modest and the Fed, along with other central banks,
made it clear that short-term rates will remain low in 2014.

Nevertheless, this only creates another puzzle. Central banks have been pulling out all the stops in
monetary-policy terms; not just in the form of quantitative easing
but in the low level of interest rates. In the first three centuries of its
existence, which saw deflation, depression and world wars, the Bank of England
never felt the need to push interest rates as low as they are now. That suggests central bankers are very worried about the economic prospects for their countries. But investors seem convinced that economies can
recover and that central banks will keep rates low; either the former are wrong
in their optimism or the latter's pessimism is overdone.

This dichotomy suggests there is scope for
some shocks in 2014: perhaps economic growth will disappoint or central banks
may signal that their monetary support will be withdrawn more rapidly than
investors currently hope. The equity markets may have got ahead of themselves a
bit last year.

There is also a threat from another direction.
Wall Street seems to have had a much better recovery
than Main Street. Asset prices have responded vigorously
while real wages have been squeezed. In equality has been widening. It is
hardly surprising that voters have become discontented, with a surge in support
for the populist right in Europe and plenty of partisan bickering in
Washington. The combination of an angry electorate and nervous governments may lead
to unpredictable policy measures and an atmosphere that is hardly helpful to
either business or investor confidence.